China Telecom Set To Enter 4G Telecom Market With A Hybrid LTE Network

China Telecom (NYSE:CHA), along with China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU), received a TD-LTE license in December last year to offer fourth generation cellular (4G) services in mainland China. The company recently partnered with several global wireless equipment manufacturers for its 4G network roll-out across the country such as Alcatel-Lucent (NYSE:ALU), Ericsson (NASDAQ:ERIC), Nokia Solutions and Networks [NSN] (NYSE:NOK) as well as China-based Huawei and ZTE. [1] [2] We expect China Telecom to start offering its 4G services later this year. Wireless market leader China Mobile is currently the only carrier offering 4G services in the country, while China Unicom is still in the process of awarding contracts for its 4G network roll-out.

China Telecom is the third largest wireless telecom carrier in China, with about 185 million subscribers. The company leads the Chinese wireless market in the 3G transition, with over 55% of its total subscribers using 3G services, as compared to China Mobile’s 25%. China Telecom has done well since it entered the wireless market, increasing its market share from only 4% in 2008 to about 15% by the end of 2013. However, it is likely to face severe competition in the emerging 4G market, as market leader China Mobile has leaped far ahead of the field in 4G network coverage and launches.

The 4G licenses issued by the Chinese government for all three network carriers in the country are based on TD-LTE (Time Division- Long Term Evolution) technology. TD-LTE is a relatively unique 4G protocol, as most carriers outside of China use FDD (Frequency Division Duplex)-LTE. China Mobile has been at the forefront of the 4G/TD-LTE infrastructure build-up and trials while China Telecom has been somewhat cautious. This is because setting up TD-LTE network infrastructure is highly capital intensive and China Telecom’s 3G network, based on WCDMA technology, is more compatible with the more globally accepted FDD-LTE technology standard than TD-LTE. Therefore, instead of following China Mobile in aggressively building its TD-LTE infrastructure, China Telecom has planned to deploy a hybrid LTE network, integrating both LTE technologies- TD and FDD. [3]

China Telecom will likely initially launch its TD-LTE network in densely populated urban areas, offering 4G internet services through data cards rather than mobile phones. This is because the carrier’s existing 3G (WCDMA) mobile subscribers won’t be able to seamlessly transition to 4G (TD-LTE) in the near term due to incompatibility issues with the chipsets presently in use on its network. China Telecom is likely to launch 4G mobile services on a large scale with the FDD-LTE standard, licenses for which are expected to be issued within the next two years.

The carrier will look to use this new network as a means to not only improve Average Revenue Per User (ARPU) levels, but also drive subscriber growth. Given China Mobile’s clout and dominance in the mobile sector, its return to strength in 3G/4G remains the most potent threat to China Telecom’s growth in the coming years.

Entry Into 4G Market Likely To Boost ARPU

China Telecom added about 32 million new 3G subscribers in 2012 and its ARPU grew almost 10% year-over-year to around $7.70 (RMB 48.5) per month. Adding 3G subscribers helps the carrier increase its ARPU levels, as 3G smartphone users consume huge amounts of internet data as compared to 2G subscribers. According to the latest subscriber data released by the company, it added more than 34 million new 3G subscribers in 2013. China Telecom should continue to benefit from the growing adoption of 3G services, since most of the growth is coming from data rather than voice, which has reached near-saturation. A higher ARPU directly impacts the company’s top line, and we believe that the carrier can grow its mobile service revenues at double-digit rates in the near term and mid-single-digit rates in the long run.

China Telecom’s foray into 4G this year should give its ARPU levels a further boost, as the company would be able to charge more for these more advanced services. 4G networks are capable of reaching peak download speeds of nearly 10 Mbps, which is more than three times that achievable on 3G (3.1 Mbps). This would not only improve user experience, but also encourage subscribers to use more data-intensive applications on their mobile devices. 4G should help the company steadily grow its data ARPU at higher than historical rates, but a lot depends on its 4G strategy and competition from rival carriers, especially China Mobile.

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